Meghan Day

Principal Solution Designer

Proxy vote: What it is, how it works, & the technology reshaping proxy season

No matter how prepared the board is for the annual meeting, there is one thing the show can’t go on without — the proxy vote. Time and distance can make it impractical for shareholders to attend the annual general meeting (AGM). However, those shareholders still have a point of view on issues that are up for a vote. What’s more, most organizations’ bylaws dictate the number of shareholders that must be present to hold a vote at all.

The proxy vote is the solution to both problems. Shareholders can represent their opinions in the boardroom, and AGMs can proceed. To help you better understand why proxy votes are so integral, we’ll explain:

• What a proxy vote is
• The mechanics of proxy voting
• Legal and regulatory frameworks
• Recent proxy votes
• Tips for carrying out an effective proxy vote
• The future of proxy voting with technology

What is a proxy vote?

In a proxy vote, a shareholder delegates another individual or firm to vote on their behalf; the person voting for the shareholder is called the proxy. This commonly occurs when the shareholder can’t attend the annual meeting in person.

Most shareholders have a proxy but may not even know it. Whether you invested through a 401(k) or have personal investments, you hold shares. If you haven’t attended a shareholder meeting, an asset manager, institutional investor, or other proxy represented you.

The proxy vote is central to modern corporations because it:

1. Gives shareholders a voice: Many don’t attend meetings, so a proxy vote offers the power to influence key decisions from afar.
2. Ensures quorum can be met: Without a proxy vote, gathering the minimum number of votes would be difficult to make the meeting valid. This could delay or invalidate proceedings.
3. Facilitates good governance: By making shareholder votes possible, a proxy vote helps organizations implement and maintain many facets of governance, like board succession.

The mechanics of proxy voting

Proxy voting is a structured process dictated by the company’s bylaws. Though the mechanics of proxy voting vary depending on the voting method, most generally involve:

1. Notifying shareholders about the meeting and agenda: The board of directors must notify eligible shareholders of an upcoming meeting and its agenda through a proxy statement, often working with the corporate secretary (CoSec) to distribute information. Proxy advisory firms may also issue recommendations to institutional investors. This includes what shareholders will vote on and instructions for proxy voting. Once they receive the notification, shareholders must decide whether to attend or delegate their voting power.
2. Issuing proxy forms: The CoSec then issues proxy forms to shareholders. These forms allow shareholders to appoint a proxy and instruct the proxy on how to vote on key matters.
3. Selecting a proxy: Shareholders select a proxy, which could be a fellow shareholder, a board member, or a trusted advisor. It is essential to choose a proxy that fairly represents the shareholders’ interests.
4. Completing the proxy form: Shareholders use the proxy form to indicate their voting preferences on the agenda items. They must also identify whether their proxy must follow the shareholder’s instructions or if they can use their own discretion.
5. Submitting the proxy form: Once complete, shareholders send the form back to the CoSec by the deadline to ensure their vote will be counted.
6. Verifying proxy forms: The CoSec will then verify the forms to confirm they are valid, complete and received on time. This is crucial to maintain good governance related to voting.
7. Preparing for the meeting: The board of directors will work with the CoSec to organize all proxy votes ahead of the meeting. Summarizing the voting intentions can help the meeting run smoothly.
8. Conducting the vote: Come proxy season and the AGM, proxies cast votes on behalf of the shareholders they represent during the meeting. The board oversees voting to ensure it’s compliant.
9. Counting votes: After the vote, the board or an independent auditor will count and verify all votes, including proxy votes. This ensures that the final tally is accurate.
10. Announcing the results: The board will announce the voting results, including how proxy votes impacted the outcome. This typically occurs during the meeting and is distributed to shareholders later.
11. Keeping records: Throughout the process, the CoSec should take and store detailed records to create a paper trail of the organization’s legal and regulatory compliance.
12. Collecting feedback and reviewing: Many organizations then hold a review period to allow shareholders to provide feedback. The board of directors can use that feedback to refine proxy voting procedures.

Legal and regulatory frameworks

Bylaws aren’t the only documents governing the proxy vote. Regulatory bodies in different regions have rules to ensure proxy voting is fair and transparent and truly gives shareholders a voice.

Complying isn’t just for the good of shareholders, either. Most proxy voting regulations come with steep legal penalties for noncompliance, such as fines, sanctions and legal action. Beyond regulatory consequences, failing to run a transparent and ethical proxy voting process can lead to long-lasting reputation damage that erodes shareholder trust and impacts stock prices.

As a result, public, private and nonprofit entities and those operating globally have extensive regulations to consider.

Proxy voting in the U.S.: SEC regulations

The SEC is the most influential regulatory body in the U.S. and has several rigorous laws and regulations organizations must follow. These include rules that govern the solicitation of proxies, ensuring shareholders have enough information to make informed decisions.

1. SEC proxy voting rules: The SEC mandates that public companies provide shareholders with a proxy statement covering all relevant information about matters up for vote. Proxy advisors must also provide their clients with adequate information to assess the proxy advice they receive. This ensures shareholders can make an informed decision before delegating their vote.
2. Sarbanes-(SOX) Act: SOX is enforced by the SEC. It requires stricter disclosure requirements and holds corporations responsible for keeping accurate records of proxy votes. It also includes severe penalties for organizations that misrepresent or mishandle proxy votes.
3. Dodd-Frank Act: Passed in 2010, the SEC implements this regulation, which has many provisions related to proxy voting. The most notable provision is “say on pay,” which gives shareholders a non-binding vote on executive compensation. This offers shareholders greater influence over corporate governance.

Proxy voting in the European Union: EU directives

The EU has several directives related to proxy voting, all aiming to unify corporate governance practices across EU member states.

1. Shareholder Rights Directive (SRD II): At its core, SRD II is a shareholder rights regulation that encourages transparency and shareholder engagement in proxy voting. Companies must disclose how shareholders cast votes to help identify shareholders, empowering them to exercise their voting power effectively.
2. EU Transparency Directive: This directive promotes more comprehensive disclosures about proxy voting to hold companies accountable for fair practices. It also makes proxy advisors responsible for disclosing conflicts of interest and how they approach voting recommendations.

Proxy voting for different types of organizations

Public companies are subject to the strict regulations detailed above. While private and nonprofit entities are not, there is some oversight for their proxy voting processes.

1. Private entities: Private and pre-IPO companies don’t face the same regulatory scrutiny as public companies. However, they risk similar reputational fallout if they don’t have transparent and fair proxy voting processes, especially if they have external investors.
2. Nonprofits: These entities may not conduct proxy votes as often, but they may utilize proxy voting if, for example, they hold investments in public companies. In that case, complying with relevant regulations is essential to maintain their tax-exempt status and uphold their fiduciary duties.

Recent proxy votes

Many proxy votes go off without a hitch and never draw substantial attention or media coverage. In recent years, however, several high-stakes proxy votes have reshaped major corporations' futures — highlighting the shareholder vote's true power.

Disney proxy vote

In 2023, Disney shareholders voted on CEO Bob Iger's leadership and revitalization strategy. Activist investor Nelson Peltz favored an agenda at odds with Iger’s that included significant cost-cutting and restructuring; he also sought a seat on Disney’s boards.

Shareholders ultimately supported the existing board and didn’t appoint Peltz to the board. While this solidified Iger’s influence, it also highlighted the growing influence of shareholder activism and the potential for shareholders to challenge board decisions.

ExxonMobil

In 2021, activist hedge fund Engine No. 1 — a proponent for renewable energy and climate change — made a daring push to shift ExxonMobil’s strategy. The fund nominated four directors to the board, three of whom were elected despite the company’s strong opposition.

This radically reshaped the board’s composition and underscored shareholders’ views on climate change. It also pushed the company to rethink its position on climate risk and sustainability and marked a significant win for environmental, social and governance (ESG) issues in the boardroom.

Tesla

Executive compensation and reducing term length for board members were on Tesla’s AGM agenda in 2022. The vote garnered significant attention because of Elon Musk’s hold on the board and the company’s governance structure.

Though shareholders voted to approve the executive compensation package, they rejected the proposal to shorten board member terms. It highlighted how shareholders value consistent governance, respected board members, and their willingness to compensate executives they approve of.

Tips for carrying out an effective proxy vote

Proxy voting is a power tool for shareholders and organizations alike. Done well, proxy votes ensure shareholders’ voices are heard and governance practices are followed. There are certain steps shareholders and organizations can take to ensure the proxy vote is effective.

Maximizing your influence as a shareholder

To represent your voice in the boardroom:

1. Stay informed: Follow company announcements, financial reports and news closely. The more you know about the context of each proposal, the better decisions you can make.
2. Review proxy statements: Analyze the proxy statement to understand the resolutions up for vote and their implications.
3. Engage with the company: Contact the investor relations team with questions or concerns about a proposal. Building relationships within the organization can give you greater influence.

Selecting a proxy

Appointing a proxy to attend meetings on your behalf is essential, but it’s also important to ensure they’ll represent your interests:

1. Choose a proxy you trust: Your proxy can be an individual or a third-party service. Either way, make sure your proxy knows the resolutions and understands your point of view.
2. Provide clear instructions: Be explicit about how the proxy votes. This can include specific votes on specific resolutions or giving them discretion in issues they know more about. This helps ensure their vote reflects your interests.
3. Understand the proxy’s obligations: A proxy has the legal authority to vote on your behalf. Validate that they take this responsibility seriously and are prepared to vote based on your intentions.

Managing proxy solicitations effectively

Shareholders have a hand in the proxy voting process, but how organizations manage proxy solicitations can greatly influence the outcome:

1. Communicate clearly: Your priority should be providing shareholders with clear information about each proposal. Transparency encourages informed voting, which is better for the entire organization.
2. Engage with shareholders: Boards that engage with shareholders early and often can address concerns and rally support for key proposals.
3. Leverage technology: Using technology for proxy solicitation and voting can streamline the process and make it easier for all shareholders to participate.

Future of proxy voting with technology

Digital platforms aren’t new to the proxy voting process but play an increasingly central role. Shareholders are looking for new ways to engage with companies, and likewise, companies want a more accessible, efficient and transparent proxy voting process.

Online portals, mobile apps and secure voting systems allow shareholders to vote quickly and securely. Streamlining the entire process can also increase participation rates among shareholders who couldn’t traditionally attend the AGM. Those solutions have evolved to include:

• Blockchain technology: This emerging proxy voting technology creates a ledger for all transactions, making it a secure, transparent, and defensible tool for recording and verifying votes.
• AI and data analytics: AI has already begun to reshape the boardroom and has a hand in how shareholders make decisions. With AI, shareholders can analyze vast amounts of data on voting patterns, financial performance and more. Companies can also use predictive analytics to gauge how different outcomes may impact the company.

Challenges of adopting proxy voting technology

Despite the vast opportunities for integrating technology into proxy voting, it also introduces new challenges:

• Security concerns: Digital proxy voting could be vulnerable to cybersecurity threats. Robust encryption, secure authentication methods and regular security audits can help uphold the voting system’s integrity.
• Privacy issues: Companies must collect and store shareholder data according to privacy laws and regulations. This requires strict data protection measures to prevent unauthorized access to sensitive information.
• Legal and regulatory compliance: As proxy voting technology grows, so does the need to navigate complex legal and regulatory requirements. Companies must also stay abreast of jurisdictional requirements for their digital voting platforms.

Master the proxy vote before your next AGM

The AGM is a pivotal moment for any organization’s governance structures. Yet, it’s also a huge source of stress for board members and CoSecs, who must ensure the proxy voting process is efficient, accessible and compliant — a challenge even before proxy voting went digital.

Effective communication and planning can facilitate a seamless proxy vote, but those are just two of the many tactics organizations need to master to master their process. Download our free seven-step checklist for a complete list of what it takes to create a solid plan for your next AGM.